Solo 401(k) / 415 limit / Catch-up

[Guest JPIngold]

My brain is fried from too many retirement plan calcs and tax returns. Can someone check my logic and see if I am missing something?

Schedule C net income for a 50 year-old = $24,000 (1/2 SE tax deduction is $1,696), so my starting point on SE earnings is $22,304.

If they declare a $2,902 PS contribution and make a $16,500 401(k) contribution, they have used up their 415 limit as the $2,902 would reduce the $22,304 to $19,402, so with the $16,500 and the $2,902, the total addition is $19,402.

Shouldn't they also be able to make a $5,500 catch-up contribution as that isn't taken into account for 415? That would result in a total contribution of $24,902 (which of course is more than income, but that doesn't matter because of the catch-up.

My tax software is limiting the overall contribution to $22,304 (which was my starting point of $24,000 less the SE tax deduction of $1,696).

Thanks for any input someone might have to clear up my confusion.

James

[PensionPro]

I am not sure of the answer here. But the regs say that a contribution on behalf of a self-employed individual is treated as satisfying section 162 or 212 if it is not in excess of the individual’s earned income for the year, determined without regard to the deduction allowed by section 404 for the self-employed individual’s contribution.

I would tend to say that he can make $16,500 deferrals and $2,902 PS. Or he can make $22,000 deferrals and $152.22 PS. I would be curious to hear other opinions.

[Guest JPIngold]

I am not sure of the answer here. But the regs say that a contribution on behalf of a self-employed individual is treated as satisfying section 162 or 212 if it is not in excess of the individual’s earned income for the year, determined without regard to the deduction allowed by section 404 for the self-employed individual’s contribution.

I would tend to say that he can make $16,500 deferrals and $2,902 PS. Or he can make $22,000 deferrals and $152.22 PS. I would be curious to hear other opinions.

Based on what you say, then I think the software would be correct because $22,304 would be his earned income determined without regard to the deduction for the contribution. So, he would get $22,000 of deferrals and $304 profit-sharing to cap it at the $22,304. I guess I thought that IRC 414(v) trumped that limitation and gave us a free pass on $5,500 of contributions. That is where I was coming up with the $16,500 + $2,902 + $5,500.

[Lou S.]

I am not sure of the answer here. But the regs say that a contribution on behalf of a self-employed individual is treated as satisfying section 162 or 212 if it is not in excess of the individual’s earned income for the year, determined without regard to the deduction allowed by section 404 for the self-employed individual’s contribution.

I would tend to say that he can make $16,500 deferrals and $2,902 PS. Or he can make $22,000 deferrals and $152.22 PS. I would be curious to hear other opinions.

I would agree with this.

edit - assuming it is a 1 man plan with no employees.

[Kevin C]

I'll agree with the software's limit of total allocations of $22,304.

First, to digress, if we are discussing 2010, the deferral amount is already set because the election had to be in place by 12/31/2010.

Assuming we are discussing 2011 or a hypothetical, a PS contribution of $2,902 reduces the earned income to $19,402, which is the maximum deferrals that can be made for the year. 1.414(v)-1©(1) prevents total deferrals, including catch-up, from exceeding compensation. $2,902 + $19,402 = $22,304. I think $304 of PS and $22,000 in deferrals works, too.

If the earned income before plan reductions is a little higher, the picture can change. The on-line EOB, Chapter 7, Section XVI, Part H 6.f.1 has an example with an age 50+ self employed single person plan where the owner's earned income after reducing by 1/2 SE, but before plan reductions is $30,000. The example says deferrals of $22,000 and PS of $6,000 for total allocations of $28,000 are ok even though it exceeds earned income of $24,000.